If We Only Had a Stable Energy Policy

I often hear the comment — “If we only had an energy policy” — but what does that really mean? In this column I will provide three examples — originating with both Democrats and Republicans and impacting both renewable energy and fossil fuels — of how constantly shifting legislation makes it very difficult to plan and execute energy projects.

Imagine that you were considering buying a home. However, let’s say your income is inclined to wild swings and the mortgage interest deduction is only approved on a year by year basis. Perhaps it is allowed to expire on occasion. In a situation like this, you would be wise to be very conservative with your purchase, or to even forego the purchase altogether.

This is analogous to the way energy companies plan and execute projects. Decisions hinge on the economics of the project. These projects are large capital expenditures and they only pay out over many years. Thus, when considering the economics of a project, it is important to have a stable environment around regulations and tax policies. Failure on these two items makes for dysfunctional energy policy.

Below are three recent examples of an unstable environment that can result in projects that will be either delayed or cancelled because of the uncertainty this causes for project economics.

Case 1: The Production Tax Credit (PTC)

The Renewable Electricity Production Tax Credit (PTC) is a per-kilowatt-hour tax credit for electricity generated by renewable energy resources such as wind, biomass, geothermal, landfill gas, and hydropower. Solar power is eligible for various subsidies, but is not currently eligible for the PTC.

The PTC was originally established by the Energy Policy Act of 1992 to incentivize renewable energy technologies for power production. Since it was first established, the credit has lapsed on several occasions only to be later extended — generally in periods of only one or two years at a time.

Congress is once again debating an extension of the PTC, set to expire again at the end of 2012. The constant political posturing over the PTC creates uncertainty for renewable energy developers. If we as a nation believe that we should encourage production of renewable electricity (and I do believe we should), these extensions of one or two years at a time are not helpful.

On the other hand, there are technologies that may never be competitive and that will need subsidies forever to survive, and that is not a prescription for success either. So a reasonable compromise — in my view — is to extend the PTC for a long period of time but reduce it over time. The current credit is 2.2 cents/kilowatt-hour for power derived from wind and geothermal, as well as for some biomass power plants. The credit is 1.1 cents/kilowatt-hour for some of the other options like power from municipal solid waste.

One might envision a 10-year extension in which the credits drop by 10% each year. Through a combination of economies of scale and improving technology, the economics should improve over time. If they do not, then opponents of these subsidies will have some assurance that we will not subsidize uneconomical options forever.

Senator Sanders does have an agenda, but it isn’t based on being informed on energy matters. He has made highly inflammatory comments on the Senate floor about ExxonMobil which PolitiFact.com deemed “false” after fact-checking his statements. He promoted misinformation on the Senate floor, and that misinformation has been repeated endlessly. So with this kind of misinformation running rampant (and it certainly isn’t just him) among our elected officials, it should be no surprise that we get ignorance-based legislation.

Senator Sanders lists the “welfare” he proposes to eliminate on his website. I would be willing to make a bet that Senator Sanders knows neither the purpose of the tax incentives he proposes to eliminate, nor the projected impact from doing so. I am not going to go through them here; you can refer to some of my previous columns (here, here, or here).

The biggest problem with the legislation is that it is not conducive to U.S. energy security. It is legislation that is politically driven, and if oil prices decline it is a prescription for a rapid decline in domestic drilling. In other words, it isn’t sensible long-term energy policy.

There are ways to capture more revenue from oil companies when oil prices are rising, and I will detail that in a future column. My proposal would actually capture more revenue than Senator Sanders’ proposal in an environment of rising oil prices, but would not have the same chilling impact if prices fall.

Case 3: Navy Purchases of Biofuels Curtailed

One of the top priorities of Navy Secretary Ray Mabus has been to aggressively pursue biofuels for Navy ships and planes. The Navy’s goals are summarized in a 2010 interview that I conducted with Tom Hicks, who is the Deputy Assistant Secretary to the Navy (Energy). In part, Mr. Hicks said:

“So what we are saying is that by 2012, to test the fleet and do the local ops that I mentioned with the Great Green Fleet, we need 8,000 barrels of biofuel. To deploy that in 2016, we need 80,000 barrels. Those are certainly quantities that – we have talked to industry – and they will have no problem with delivering. By 2020, we go from 8,000 to 80,000 to 8 million barrels, is what our need is to meet that goal of 50% alternative fuel. So if we were to sit passively back and not send out the demand signal, perhaps we would have a different outcome. We choose a leadership position, and part of that position is sending out a strong demand signal to the market, that if you can deliver this; if you establish this; if you can meet it at a competitive cost long-term, then this is something we are going to commit to.”

In support of these objectives the Navy has made major purchase over the past few years of biofuels made from various feedstocks, including algae and camelina. However, the prices paid were well above the price of petroleum-derived fuel, and last week the House Armed Services Committee voted to put a stop to the practice — once more marking an abrupt change in energy policy.

Again, whether you agree or disagree with the Navy’s commitment to purchase biofuel, here is another example of changing legislation that can totally stunt the development of advanced biofuels. If you are an opponent, you may think this is a fine idea, but there has to be a better way.

The biggest problem with the Navy case is that the amounts paid for the fuel were 4 or 10 or even 100 times more than the price paid for petroleum-derived fuel. Further, the prices paid were not transparent. The fuel contracts frequently contained money for research which made it difficult to determine exactly how much was paid for the fuel. I think it was fairly obvious that this sort of practice would eventually be stopped, but as in the case of the PTC it would have probably been politically feasible to provide long-term incentives that phase out over a period of 10 years or so.

Conclusions

“A sound energy policy should take into account the supply side, the demand side, and the possibility that projections will be wrong on one or both counts. Energy policy decisions must also factor in the impact on current and future generations, and they should be capable of weathering changing political climates.”

In order to develop long-term alternatives to oil (or as in the previous example, to develop our domestic oil), it is important that the rules don’t change every 2 to 4 years. Energy projects span much longer than election cycles, and if energy policy can’t withstand changing political climates the result is paralysis.

I believe the best possibility of passing energy legislation that is stable for energy producers, yet palatable to both major political parties is to build in mechanisms that either phase out subsidies over time, or that automatically change tax incentives based on the price of oil. However, even then there is nothing to prevent the next election from ushering in new leaders who will completely overturn existing energy policies.

Thus, the real reason we have dysfunctional energy policies is that we elect dysfunctional leaders. We just have to figure out ways of working around them.

I do not disagree, but I fear we might be too late. Our current dysfunctional leader and his Czars and Czarinas have apparently figured out how to bypass the Congress, currently rendered dysfunctional by a Senate led by the dysfunctional leader’s own party. We are rapidly regressing from representative government to “benevolent” despotism. (Such “benevolence” is rarely as durable as the despotism.)

Our current dysfunctional leader is an “all renewables, all the time” advocate, hell-bent on increasing energy prices to drive fossil fuels from the US economy. He was unable to achieve his goals through legislation (Waxman-Markey, Kerry-Boxer, Kerry-Lieberman), so he has “moved on” to regulation. EPA is now the “tool of choice”, with a little help from a Supreme Court which ignored the will of Congress as expressed in the CAA and its later amendments. The future of coal as an energy source for the US economy is probably non-existent, or very soon will be. (US coal production will likely be progressively diverted to China, where it will undoubtedly be burned with far greater regard for the local and global atmosphere.)

RR: Kudos! You’ve made some astute observations about Federal Energy Policy which helps people to interpret some of the nuances concerning such interwoven complexities. And what side of the fence you may be on – dictates every action, consequence or profit motive therein.

People also need to realize that the U.S. Navy putting out an advance ‘purchase call’ for alternative fuels to meet 50% of their downstream defensive combustion – have paid $35 to $40+ (perhaps much higher) per gallon to test-sample more ‘float on water’ alternative oils. These are a plethora of ‘second-generation’ new biofuels, right?

This is the paradigm shift which buyers and sellers alike don’t seem to interpret at all. Oil squeezed from camelina or algae or even edible restaurant cooking grease – still floats on this planet’s water bodies just as BP’s crude oil Gulf Gusher is – beginning two summer’s ago.

Makes me think about a quote provided to me by a now RIP former Gazprom Official who said “The first green is the money to be made. The second green will become the near-term environmental improvements.”

This gentleman was evaluating something new, cheap and easy to produce in great volumes which ostensibly didn’t need any Government Subsidies nor specific Energy Policy Legislation to assist it whatsoever.

He interpreted this new biodegradable liquid fuel seamlessly moving out into the mainstream global marketplace through tankerships, pipelines, barges and railcars to established refiners/blenders, coal combustion power plants, retrofitted Nuke electric plants – even Navy jets and boats. When spilled into water bodies – nature’s bugs and bacteria consumed this magnetically-polarized new oxycarbon fuel as a free lunch.

I agree with you that Federal Energy Policy is a highly-charged domestic affair from the Congressional perspective all the way to energy end-users. This same U.S. Federal Energy Policy also affects far greater real-world consequences such as territorial control wars for $125/bbl float-on-water-oil amid overthrown Dictators and Nations preparing for bankruptcy…

Transportation fuel production, combustion, global energy economies and climate change are interwoven to put it mildly. Thus, I won’t be voting for any incumbent this year. Next day…and keep on educating your growing audience!

And, Tom, you forgot the other kind of c0ngress critter we could really do without, ex-finance guys.

Ex-lawyer congressman to his ex-finance bench neighbor : ” Do you think we can set up a futures market on snakes and rising waters ? ” Answer ” Sure, aint gonna do jack s**t for New Orleans but they gonna love it in London ! At last, progress for the masses ! Aren’t we awesome or not ? “.

It does not get any more stable than this: All energy market/pricing/sourcing/pollution/mileage regulations needs to be COMPLETELY ABANDONED in favor of a simple, single rate carbon tax that scales up to $1 per gallon.

After all, why impose thousands of clumsy and circumlocutory regulations like smog regs, greenhouse gas regs and CAFÉ standards on businesses to control carbon emissions or fuel efficiency when a single, simple-to-calculate, simple-to-administer, revenue-generating carbon tax can get the job done?

How do you get conservatives to agree to a carbon tax? Easy – simply answer these two questions:

1) If the solution to too much CO2 in the air is to use less fossil fuels, why is NOT the solution to too much federal debt to use less government?

2) If the optimal amount of CO2 in the atmosphere is 350 ppm (current=389 ppm) because that is the optimal concentration of CO2 in our atmosphere that life as we know most likely can continue, why is 18% of GDP (current =25% GDP) NOT the optimal size of the federal government since that is the size that most likely yields maximum economic growth?

Get those two questions right and you’ll have Conservatives begging you for a carbon tax.

Think about it. Progressives and Conservatives are actually making the same apocalyptic argument albeit on different issues. They both make good arguments for action. But the public is yawningly uninterested in AGW and unwilling to make the hard choices on America’s fiscal problems. Buying off the opposition is the American way.It’s time for progressives concerned about rising temperatures and conservatives concerned about rising federal debt to realize the obvious: they need to BUY each other off in order to effectively address their pet ideological concerns-there is no other way. This means trading, among other things, a carbon tax for a balanced budget amendment and a more limited government. This plan — the LMAD PLAN — is outlined at http://letsmakeadeal-thebook.com

The LMAD PLAN BUYS OFF Liberals with much more than just a $600 billion carbon tax. It also adds fully-funded Healthcare for every American, a public option health insurance entity, and the implementation of tax schemes frequently advocated by Liberals such as a “sugar” tax and a value-added tax. The LMAD plan even grants overnight amnesty of 10 million illegal aliens.

LMAD buys off Conservatives with much more than a balanced budget and limited government ; it permanently ends future illegal immigration, adds tort reform and completely replaces all taxes on production, labor, saving and investment with the new carbon tax, the value-added tax and the sugar tax.

The LMAD plan even removes the burden of healthcare expenses from corporate balance sheets by ending our reliance on employer-provided health insurance.

It does not get any more stable than this: All energy market/pricing/sourcing/pollution/mileage regulations needs to be COMPLETELY ABANDONED in favor of a simple, single rate carbon tax that scales up to $1 per gallon.

That’s a similar approach to the one I advocated in my book. It would tilt the balance toward renewables, conservation, and mass transit without picking specific technology winners.

Robert, excellent points throughout. A stable environment around regulations and tax policies is the key to sound energy policy, which is has been hard to come by in recent years, but something for which U.S. leaders should strive. As highlighted in API’s recent policy roadmap the direction of our nation’s energy policy is vital to our country, and our elected representatives and policymakers have crucial decisions to make on economic policies and programs, which will be influenced greatly by energy policy. Thanks for calling attention to such an important subject.

To quote Walt Kelly, the creator of the comic strip “Pogo” — “We have met the enemy and he is us”….As you so adroitly point out our energy policy problems are simply an extension of our own dysfunction. We allow non scientific legislators to make decisions based on poorly informed or corrupted motives and we wonder why things are so bad. Challenge as we might these self important idiots we find little relief as we still lack a coherent, consistent and effective energy policy that well avert the disaster of having no way to replace fossil fuels when they become too depleted to serve our needs.

Picking losers and winners in the renewable arena (or should I say TRYING to) is understandable (I’m guilty of it myself) but often leads to misappropriation of public funds. Those who invest their own money obviously seek to be winners. Their “picking”, hopefully based on sound scientific thinking, will most probably be what saves our cookies. If they had a sane energy policy (that being the policy that you outline) coupled to a rational carbon tax that would foster development in the direction of sustainable clean energy then our transition to a livable future would be assured. Under the present paradigm I’m not so sanguine about where we will eventually wind up!

Thanks for your clear thinking on this most important of human matters.

There are ways to capture more revenue from oil companies when oil prices are rising, and I will detail that in a future column. My proposal would actually capture more revenue than Senator Sanders’ proposal in an environment of rising oil prices, but would not have the same chilling impact if prices fall.

I don’t know what you have in mind, but as you note, one of the biggest hurdle to any kind of long term investments is volatility, regardless of the type of activity as long it’s capital intensive. And the volatility of oil prices has taken a huge toll on all attempts to develop a long term alternate fuel policy. Best case in point is what we saw when pretty much everything that started under Carter (and mostly continued under the first term of Ronald Reagan, that closeted flaming liberal) got canned in the mid and late 80s, as oil prices plunged.

Stability is sorely needed on oil prices. One idea would be a degressive import duty on oil to put a floor on domestic oil prices. The duty would go down when world prices go up and cushion their effect on consumers and go up when world prices fall to protect domestic production.

That would give stability to domestic operators, and not just for oil production but for also to alternate fuel producers. They would have a fairly good idea of what domestic prices would be over, say, a ten years horizon and would be able to invest on that basis rather than fear to see their margins suddenly blown out by a spike in foreign production and fall in imported oil prices. It would give those entrepreneurs enough time to get their operations going and benefit from accumulated experience to become really competitive, rather than those boom-bust subsidy cycles we’ve seen since Nixon’s days.

If it an idea like that ever gains traction (tough luck, given the blockheads we have in Congress), it would be important to make it as self-adjusting and self-administered as possible so Congress doesn’t get too many opportunities to mess with it. Calculating the floor price would be an important aspect of this duty, probably some form of ratchet mechanism based on observed import prices over a multi annual window, something that would give foreign swing producers an incentive to manage world oil prices volatility on their own.

Another potentially important tweak could be to give US oil refiners incentives to invest in bottom of the barrel operations, may be through a lower duty on heavy crudes and reexport exemptions while applying higher duties on finished products. The goal would be to push them to bring home as much as possible to the added value that refining operations can generate (a lot). Capital intensive always beats input dependent in the long run, but it requires some measure of short term stability to happen.

dod not find a way to purchase an electronic version of you book (don’t have a kindle nor creditcard so Amazon is not accesible for me) so I might say something you already discussed. Here in Europe Germany seems to me an example where the energy policy has a more sane and rational approach. They rampup anaerobic digestion, wind, hydro and solar in a speed that is breathtaking and with result: growing economy and a fast path towards the goal of lower fossilfuel dependence: at last saturdays peak they reachen 50 % of national electrical power supply according this press article;

let me see— bernie sanders a self proclaimed socialist aka–commie who lies about american companies on the senate floor and works with a muslim congressman to promote their utopian ideas of punishing the job creators and energy producers from the usa… did bernie have anything to do with the sale of central vermont energy to the infamous gazprom a russian oligarchy? did he collect a quiet finders fee? has he enriched his retirement fund? why was this american company sold to a russian business from a country that still seeks to destroy the capitalist usa?